Generally speaking we take life cover for a purpose, it’s not just something we wake up in the morning and decide that we need to buy it for no reason. We have a mortgage we would like to pay off, we have dependent children we would like to financially support or we have funeral expenses we would like avoid being left to our family in the untimely event of us shuffling off our mortal coil.
Its not too difficult to understand the reason(s) why we part with our hard earned cash to fund life protection however what can come as a bit of a shock is what actually happens in the event of a claim and this is something that may alarm even the most savvy.
Lets take Mr and Mrs A, who are married and have a joint life policy taken out to pay off their £100,000 joint mortgage. Mr A dies prematurely on Monday. What happens to the life policy? Is it paid directly to Mrs as they are married and/or it’s a joint policy? Not automatically, No. Is it paid directly to the mortgage lender as the policy is to repay the debt on death? Again the answer is no.
The circumstances are a little different depending on the presence of a will. If the clients in question have no will (ie Mr has died intestate) the £100,000 will be paid into the “deceased estate”. The process of releasing the funds to Mrs from the estate is called probate in England or confirmation in Scotland. This can take any were from 12-18 months and can cost 3-7% of the value of the estate in fees.
If, however, the clients do have a will the process of executry can still take up to 6 months for the insurance to be paid as per the instructions on the will. Again there will normally be a fee for this from the solicitors — below 2% is fairly uncommon to give you an indication.
Now consider your own situation for a moment, if you have life insurance could you (or your partner for that matter) afford to pay all the bills INCLUDING the mortgage for the 6 months that it takes for your will to be executed? If the answer is at best a maybe then its something you really should address. A trust is a legal document that allows you to select who you would want your insurance to be paid to (generally done at the commencement of your policy) in the event of your death. This is not set in stone and is normally by way of a discretionary document which can be changed as and when circumstances dictate. There is no probate/confirmation, the pay out attracts no exectury costs, it avoids inheritance (if applicable) and is ring fenced from any creditors/family you wish not to benefit from the pay out.
So why then would someone not have Life insurance written in trust?
The question then is how to put life insurance in trust? The answer would be discuss this with a financial advisor to make sure the correct trust is implemented.
*Trusts are not regulated by the FCA and are not suitable in every single situation.